We’ve moved past Trump’s China speech without the market hearing anything that will upset China too greatly and promote an immediate reaction. The fact HK has lost its special trading status (with the US) could impact HK, but one questions whether it will really anger the CCP.
China PMI (released Sunday) was a touch weaker on the manufacturing side, and strong on the services read, but there has been limited reaction on the FX open, although we’re seeing S&P 500 and NAS futures finding a few sellers on open and this may weigh on the Asian equity open.
US equities moved through the Trump speech with ease, with USDCNH selling off hard putting a bid in equities and risk FX, with strong gains in the BRL, NOK and AUD. The NAS100, despite today’s open, just looks so bullish on the daily or weekly timeframe, and at this risk of giving the index the kiss of death, new all-time highs seem a reasonable bet. The US500 also looks strong, and as long as it can build on the move through 3037 then I hold a bullish bias. Interestingly, despite the US benchmark being -5.8% YTD, we can still see close to 40% of index constitutions lower by 20% or more YTD, so breadth continues to be a consideration.
I find it hard not to focus on the US bond market as a major influence of risk here. The fact that implied volatility (vol) in the US Treasury curve is not too far off its all-time low (set back on March 2019) paints a story that few participants expect dramatic moves, and the fact the Fed is talking about yield curve control is clearly suppressing Treasury vol. A calm bond market is a risk-friendly backdrop for equity appreciation, especially growth stocks, while risk FX and high carry (income) currencies will also do nicely.
(US Treasury vol – the MOVE index)
(Source: Bloomberg)
AUDUSD and AUDJPY have been my default equity proxies, but I quite like the look on CADJPY and if this can build on its break of 77.86 then I’ll be looking for upside here, raising conviction levels on a close through 78.49. Trading this pair doesn’t come without risk though, especially with the BoC meeting on Thursday and the possibility of more stimulus. So, as always, it feels prudent to start with a small position, even if CAD 1-week implied volatility is low, where I’ll add as price moves in the intended direction.
Another major consideration from US bond markets is the trend in ‘real’ expected yields. The fact is that when we subtract the yield on offer in the US Treasury market, or any global DM bond market for that matter, by inflation expectations we see ever deeper negative ‘real’ yields. If yields go lower, and inflation expectations either start to rise or fall at a slower pace (than nominal bond yields) then equity becomes more attractive and people will be ‘happy’ to pay outrageous valuations. The concept of T.I.N.A (There is no Alternative) rings true here.
I guess we can also argue that the equity market is pricing a solid recovery from 2H20 and into 2021, which one hopes will play out but seems optimistic.
(US 5yr real yields)
(Source: Bloomberg)
We have seen greater unrest in the US over the weekend, but whether this has an impact on economics is a point of debate. The protests and anger in the US are a political consideration though, and there is no doubt that investors are starting to consider Biden’s prospects for taking the White House, especially if he has an able running mate in Kamala Harris. Certainly, if it were down to a popular vote then Biden would be confident, but under the electoral college system, Trump would still be small favourite but its close. Let’s also not forget the race for the Senate, and if Biden can get the WH the DEM’s need three seats to then take the Senate.
Whether a Biden win would be a vol event is yet to be seen, but he is considered to be more hawkish on taxes and we’re seeing those companies that performed well post 2016, and the sizeable tax bump that boosted the bottom line, now underperforming.
Politics and geopolitics aside, it is a massive week for data. There is a human angle to economics which must not get lost, but I want to say data has been largely irrelevant for markets. That notion will be brought to the test this week, where better data could be fodder for the bulls who need validation, even this early on, that the economy is going the way portrayed in valuation.
Here are the weekly implied moves derived from 1-week options. It offers a sense of expected movement after assessing what’s on the radar.
US
China
UK
EUR
Canada
Australia
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